12/02/2009 @ 4:00AM

Battle Of The Billionaires

Far from their home turf of Nevada, two American billionaires are facing off in the world’s fastest-growing gambling market.

Just two months after Steve Wynn listed his Macau casino on the Hong Kong bourse, Sheldon Adelson followed suit; shares of
Las Vegas Sands
‘ operations in the Chinese gaming enclave started trading on Monday.

The former Portuguese colony is becoming even more fertile ground for a head-to-head competition between Sands and
Wynn Resorts
. In November, Macau’s gambling revenue skyrocketed 59% year-over-year, more than double analysts’ expectations. And numbers for the rest of the year will only improve, according to a CLSA research note, because the December holidays should bring an uptick in visitors to the region.

By contrast, across the ocean in money-losing Las Vegas casinos, revenue has fallen by about 20% since last year. Macau gaming revenue is already twice the Strip’s, CLSA said, plus it is recording annual growth of 50% to 60%.

“In contrast with a still-depressed Las Vegas, sentiment in Macau is on the upswing,” Kevin Tsang, assistant vice president and analyst at Moody’s, wrote in a report released earlier this fall. “A majority of the consolidated revenue and operating profits of both of these U.S.-based gaming issuers now comes from their Macanese operations.”

After new rules shattered gambling mogul Stanley Ho‘s monopoly in Macau in 2004, companies rushed in to challenge his preeminent SJM Holdings.

It wasn’t just Wynn and Sands who entered the ring — joining them were Hong Kong-based Galaxy Entertainment Group and two firms that are Ho satellites of a sort: Melco Crown Entertainment, a joint venture between Ho’s son Lawrence and Australian billionaire James Packer, and the most recent arrival, a casino run by
MGM Mirage
and Ho’s daughter Pansy.

But amid the crowded playing field, Wynn and Adelson have emerged near the top of the pack.

“In the first five years since deregulation, Las Vegas Sands and Wynn have been the big winners — LVS early on and Wynn more recently,” a May CLSA report said. With 31% market share, Ho still dominates his rivals. But Sands boasts 26% and Wynn notches 13%, tied with Melco, according to the report. MGM’s patriarch, Kirk Kerkorian, isn’t so fortunate: his casino clings to an 8% share.

Here’s how the two billionaires’ Macau strategies stack up: Wynn may have been the first to get his company listed in Hong Kong, but it was Adelson who was the first of the foreign contingent to open a casino in Macau after the government broke Ho’s stranglehold on the industry there.

Since then, Adelson’s focus has shifted from the Sands casino near the ferry terminal to the reclaimed stretch of land in Cotai where the sprawling Venetian Macao is located. Opened in August 2007, the Venetian is aimed at the so-called MICE (Meetings, Incentives, Conference, Exhibitions) segment of the gaming industry.

The Venetian Macao, where gondoliers serenade visitors in canals that snake through the complex’s massive shopping mall above its gaming floor, is touted as the world’s biggest casino.

While Sands focuses on the mass market, Wynn targets big-spending visitors and therefore relies on junket operators, who lure these coveted clients into the casino. VIP gamblers make up the bulk of casino revenues in Macau, but margins for these customers are much smaller due to the hefty commissions the junkets collect for their services.

As for which stock is the better buy, analysts are split.

Morgan Stanley gave Wynn an “attractive” rating, noting its clean balance sheet, stable market share and focus on elite customers. But relying on cash-rich spenders is a gamble in an environment where people have become more budget-conscious, Citigroup analysts said, and new casinos in Singapore could steal some clients away from Wynn’s new project, called Encore, slated to open its doors in 2010.

Another downside, Citi analysts observed in a Dec. 2 report, is that Wynn hasn’t announced any plans for development in Cotai. Sands has already put down roots there with the Venetian — and it aims to develop sites 5 and 6 in the long swatch of land there.

Adelson said Monday that Sands is even eyeing further expansion into markets like Japan, Thailand, India, Vietnam and Malaysia. It has no interest, however, in tapped-out Las Vegas. “Unless I can take something in Vegas and convert it to something we’re specialists in, the convention business, there is nothing in Vegas we’ll seriously consider acquiring,” he told Reuters.

On Nov. 30 Credit Suisse issued its first report on Sands China, which fell up to 15% during the first day of trading in a disappointing debut after raising $2.5 billion in the share sale. Analyst Gabriel Chan wrote that the company is too saddled with debt and might require additional financing next year to keep pace with its repayment schedule.

But on Wednesday, after news broke that Macau’s November revenue had surged, shares responded in kind. Wynn Macau jumped 6.2% to 10.40 Hong Kong dollars ($1.33), while China Sands climbed 6.7% to close at 10.18 Hong Kong dollars ($1.31).

A major drawback to both Wynn Macau and Sands China shares, analysts concur, is that they’re expensive.

Longer-term risks include intense competition, lower liquidity and tighter lending in the mainland and overcapacity from new casinos and additional gaming tables, analysts say.

In addition, the steady steam of mainland gamblers from nearby Guangdong province depends upon the vagaries of the Chinese government’s visa policies.

Despite all that, most analysts, including CLSA’s Aaron Fischer, are bullish on the sector as a whole.

“We’re seeing a really rapid recovery in gaming revenues. It’s going to result in earnings upgrades from the brokers over the coming weeks and drive up the share price for the stocks,” Fischer said in an interview Wednesday. “The company that will benefit the most will have the most aggressive expansion plans and the highest financial leverage.”

At the moment, that’s Adelson’s Sands, with its designs on Cotai and beyond. But in a battlefield so rich with opportunity and overflowing with cash, more than one casino billionaire could emerge victorious.